Clearing houses to publish traders' risk models

Clearing houses will be required to publish their models for calculating traders' risk in their derivatives trades under principles set to be endorsed by global securities regulators.

The industry has agreed to guidelines requiring more transparency in the models they use to calculate their resources in a default and their customers' margin requirements, according to two people familiar with the discussions.

The agreement represented a change of stance from many clearing houses, who have argued their operations and market confidence could be damaged by the publication of sensitive data.

An agreement has been accepted by companies such as CME Group and LCH.Clearnet, which run two of the world's largest clearing houses, the people said. Consequently, the International Organisation of Securities Organisations, an umbrella body for central banks, is likely to agree to public quantitative disclosure standards, to be published in coming months. Madrid-based Iosco declined to comment.

The standards are being jointly developed by Iosco and the Committee on Payment and Settlement Systems (CPSS), part of the Bank for International Settlements. The consultation report was first published in October last year.

Clearing houses have moved to the forefront of a global regulatory push to stabilise market post-financial crisis. Also known as a central counterparty (CCP), it stands between two parties on a trade, ensuring the deal is completed in the event of a default.

While many clearing houses resisted the idea, clearing banks have realised they are dependent on the financial health of other members, as well as the clearing house. Consequently, understanding the clearing houses' risk models has weakened the industry's position.

The failure of Hanmag Securities in Korea in February, in which the clearing broker passed on the cost of default to its members, has also led to an industry reassessment.

The compromise was agreed following a meeting of industry representatives, regulators and central banks in London a month ago. Principles likely to be introduced include mandatory quarterly public disclosures for standards on total value of default resources, initial margin rates on individual contracts and the size of "haircut" that would be made to collateral eligible as initial margin, the people familiar with the talks said.

There is a likely 12-month phase-in period. CPSS-Iosco is set to allow delay of a months before publication and will only ask for summary data.

The agreement also represents a victory for the Bank of England, which had led the way in calls for more transparency. An assessment conducted by the BoE in May found strong divergence in the risk assessments - even in approved models - for clearing houses and large broker-dealers.

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